India has large foreign exchange reserves,holdings of cash,bank deposits,bonds and other financial assets denominated in currencies other than India’s national currency, the Indian Rupees. These reserves are managed by the Reserve Bank Of India for the Indian government and the main component is foreign currency assets.
Foreign-exchange reserves act as the first line of defense for India in case of economic slowdown,but acquisition of reserves has its own costs. Foreign exchange reserves facilitate external trade and payment and promote orderly development band maintenance of foreign exchange market in India.
As at December 2019, India’s foreign exchange reserves are mainly composed of US dollars in the forms of US government bonds and institutional bonds with nearly 6% of forex reserves in gold. The foreign currency assets also include investments in United States Treasury bonds, bonds of other selected government and deposits with foreign central and commercial banks. India is at the 7th position in the list of countries by foreign-exchange reserves, just below Saudi Arabia.
Reserve Bank of India Act and the Foreign Exchange Management Act,1999 set the legal provisions for governing the foreign exchange reserves. Reserve Bank of India accumulates foreign currency reserves bof India act as a cushion against rupee volatility once global interest rates start rising.
The foreign exchange reserves of India consists of four parts which are: Gold,Reserve Tranche Position, Special Drawing Rights (SDRs) and Foreign Currency Assets.
In 1960,forex reserves l covered,just 8.6weeks of imports. In 1980, India had foreign exchange reserves of over U$7billion,more than double the level (U$2.55billion) of what China had at that time.
Foreign Exchange reserves of India reached milestone of $100billion mark only in 2004. India was forced to sell dollars to the extent of close to U$35billion in the spot markets in financial year 2009 due to 22% depreciation in rupee (against the dollar) in the same fiscal year 2009.
The country’s foreign exchange reserves fell by a whopping USD 11.98billion to USD 469.909billion as at March 20 as the Reserve Bank continued to supply dollars into the market to stem fall in the rupee. The rupee hit an all-time low of 76.15 against the US dollar as foreign investors continued to withdraw money from domestic equity and debt market amid certainties due to the fast spreading coronavirus. This was the first decline in the country’s reserves in almost 6months. Forex reserves had dipped by $15billiom during the year 2008.
The reserves has touched a life-time hight of USD487.23billion in the week to March 6,after it rose to USD5.696billion.
During the week to March 20,the foreign currency assets (FCA), a major component of the overall reserves,declined by USD 10.256billion to USD 437.102billion.
Expressed in dollar term,the foreign currency assets include the effect of appreciation or depreciation of non-US units like the euro,pound and yen held in the foreign exchange reserves. The gold reserve,which was rising for the past many weeks, decreased by USD 1.610billion to USD 27.856billion as RBI data showed. The special drawing Rights with the international monetary fund (IMF) were down by USD 40million to USD 1.409billion.
The last time the RBI sold as many dollars was in 2008 during the global financial crisis when reserves fell by $15billion in October 2008. With the preceding $5billion sales, RBI has sold $17billion in the last fortnight.
Despite sales by RBI, the rupee has been touching new lows. The RBI did not target any particular level for the rupee in the past but stepped in when the market got too one-sided.
